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Bridgeton Industries

Authors: Philip Larson

Bridgeton Industries: Automotive Component & Fabrication Plant Philip Larson

1) Are the changes since 1987 in overhead allocation rates significant? Why have these changes occurred? Equation: Overhead Allocation Rate = overhead for period / allocation base for period Example Allocation ases: Direct labor dollars, direct labor hours, machine hours, direct material dollars, etc.

19 ! 19 19 9 199"

1"!9#$ %$& % 1%%'&# ''"1#$ 1"9 9" %#%9$ 1%!'&' '#1"!1 ! 1#! 1'#'! &&9#& %1&'' !9'9' 1$1"% &9#$& %%&#$%

The changes in 1 !! do not appear significant. "o#ever, the changes in overhead allocation rates in 1 ! and 1 $ do appear to be significant #hen compared to 1 !% rates. The reason these changes have occurred can be seen belo#. &ssentiall', bet#een 1 !! and 1 ! total overhead costs decreased at a slo#er pace than direct labor costs, direct material costs and sales. The case stated that at the end of the 1 !! model 'ear (oil pans and muffler e)haust s'stems #ere outsourced from the A*+, #hich could help e)plain #h' direct labor costs and material costs #ent do#n faster than overhead.

!) "alculate the expected gross margins as a percentage of selling price on each product #ased on 1988 and 199$ model year #udgets% assuming selling price and material and la#or cost do not change from this standard&

To ta lO ve rh Di ea re d ct (O La H) bo Di rC re ct os M ts at (D er Sa LC ia le ) lC s os ts (D OH M /D C) LC OH /D M OH C /S al es

$'!( ( ''( $'$( &( '1( #!!( 11!( '&( #&'( 11$( '#(

Bridgeton Industries: Automotive Component & Fabrication Plant Philip Larson Equation: -ross margin = sales revenue . cost of goods sold To find the gross margin, #e must figure out the cost of the goods sold. The cost of the goods sold #ill include the labor costs, the material costs as #ell as a portion of the overhead costs.

Therefore, the gross margin percentages go do#n significantl' from 1 !! to 1 $. The reason for this is because the overhead allocation rates #ent up significantl' ma/ing the overhead costs for each product significantl' higher in 1 $ than in 1 !!. ') (repare an estimated model year #udget for the A") in 1991& What *ill the overhead allocation rates #e under the t*o scenarios& Equation: 0tandard cost = e)pected 1budgeted2 cost for a given period +cenario 1: 3nder scenario 1, no additional products #ill be dropped in 1 1 from 1 $. Therefore, the change in overhead allocation rate from 1 $ to 1 1 #ill be similar to the change from 1 !% to 1 !! 1another 'ear #here the product line did not change significantl'2. The differences in 1 !% to 1 !! are fairl' negligible. 4f #e assume that change in overhead from 1 $ to 1 1 #ill also be negligible because the product line has not changed, then the 1991 overhead allocation rate *ill #e the same as the 199$ overhead allocation rate of ,-'.& +cenario !/ 3nder scenario 5, the manifolds products #ill be dropped in 1 1. Therefore, the challenge is to figure out ho# much the 1 1 overhead is li/el' to drop from the 1 $ given that part of the overhead is unnecessar' if manifolds are not being produced. This is analogous to the drop in overhead from 1 !! to 1 ! #hen A*+ dropped mufflers and oil pans. Additionall', #e must also figure out ho# much total direct labor costs are li/el' to go do#n no# that manifolds are not being created. Assumption 1: 4 assume that the change in overhead divided b' the change in direct labor is constant. That is, 6O"/6D7* = /. The best e)ample of calculating this change is to loo/ at #hat happened from 1 !! to 1 ! #hen A*+ dropped mufflers and oil pans.

Bridgeton Industries: Automotive Component & Fabrication Plant Philip Larson

Assumption 5: -iven that D7* for manifolds in 1 $ #as 8,9:$ and these #ill all go a#a' in 1 1 if manifolds are dropped, 0 assume that 123" 4 -,5$ from 1 $ to 1 1. Therefore, 167 4 -,5$ 8 !&-99 4 17-,!% and 671991 4 79'9' 9 17-,! 4 -1%75!. Therefore, the Overhead Allocation Rate for 1 1 #ould be 671991:23"1991 4 -1%75!:;151$!9-,5$) 4 81-.